The article published last week addressed the responsibilities of investors. We discussed the benefits of working with your investment advisor and familiarizing yourselves on the performance of the company. Accordingly, investors will have to read company financial reports and research conducted by independent bodies to evaluate the stock.
Today’s article will focus on the technical jargon you will come across when reading these documents. The terms are given in alphabetical order.
Accounts Payable: Money a company owes to it’s to suppliers. Accounts payable are a liability of the company.
Accounts Receivable: Money a company is owed by its customers. Accounts receivable are an asset of the company.
Accounts Receivable Turnover (also known as Receivables Turnover) : A figure used to measure how quickly customers pay their bills. It is calculated by dividing credit sales for a specific period by the average accounts receivable.
Accrual Basis Accounting: A method of accounting that reports income when it is earned (although not necessarily received) and expenses when incurred (even if bills are paid later). This is in contrast to cash-basis accounting, which reports income when it is actually received and expenses when they are actually paid.
Allowance for Bad Debt:Money a company sets aside to cover the possibility that some customers may not pay their debts.
Amortization: Allocation and charge to expenses of the cost of intangible assets over their useful life. It also refers to the process of accounting for the reduction of debt through regular payments over a set time period and/or in accordance with a pre-determined schedule.
Annual Report: A brochure that a company sends out to shareholders, which includes audited financial statements and a report from management.
Asset:Anything that a company owns that has monetary value. Examples of assets include buildings and equipment, cash, accounts receivable, short- and long-term investments, inventories or prepaid expenses. Assets are listed on the company's balance sheet.
Balance Sheet: A summary of a company's assets, liabilities, and shareholder's equity.
Beta: A measure of the volatility of a stock relative to an overall market index during a given time period. The market has a beta of one; therefore, a security with a beta of one is exactly as volatile as the market. A beta of less than one indicates lower volatility than the market; a beta of more than one indicates higher volatility than the market. Sometimes, beta values can be negative, indicating that the stock moved in the opposite direction of the market index during the given time period. In most cases, negative betas are short-lived and not indicative of the underlying volatility of the stock.
Book Value: A company's assets, minus liabilities and intangible assets.
Capital Appreciation: An increase in the market price of an asset, such as stocks.
Capitalization: The sum of a company's long-term debt, stock and retained earnings.
Cash Basis Accounting: A method of accounting that reports income when it is actually received and expenses when they are actually paid. This is in contrast to accrual basis accounting, which reports income when it is earned (although not necessarily yet received) and expenses when incurred (even if bills are paid later).
Cash Flow:A measure of the inflows and outflows of cash experienced by a company. You can find this information in the company's Statement of Cash Flows.
Common Stock:Securities representing ownership in a corporation, which provide voting rights and entitle the holder to a share of the company's success through dividends or capital appreciation.
Consensus Ratings/Consensus Estimates: The average of several analysts' recommendations concerning the securities of a particular issuer.
Current Assets:Assets those are easily convertible to cash. Cash, short-term investments and accounts receivable are examples of current assets as they should result in cash within the next year.
Current Liabilities: Debt or other obligations that are payable within the next year.
Current Liabilities to Inventory Ratio: A ratio calculated by dividing current liabilities by inventory. This ratio yields an indication of the extent to which a company relies on funds from disposal of unsold inventories to meet its debts.
Current Ratio: A ratio calculated by dividing a company's current assets by its current liabilities. The higher the ratio, the more easily a company can meet its short-term debts.
Debt: Money the company borrowed and must repay.
Debt-to-Equity Ratio: A ratio calculated by dividing a company's long-term debt by its stockholders' equity. Because long-term debt reflects obligations that a company must eventually repay, a high ratio may indicate high risk.
Depreciation: For accounting and tax purposes, the allowance made to reflect a tangible asset's loss in value over time.
Discount Rate: The interest rate that the Federal Reserve charges on its loans to banks.
Discounted Cash Flow: The present value of future cash flows.
Dividend : Portion of a company's earnings paid to shareholders. Dividends are usually paid on a quarterly basis.
Dividend Yield: The annual percentage rate of return a stock earns from its dividends. You get the dividend yield by dividing the annual dividend by the stock's current market price.
Earnings Per Share (EPS): A company's earnings divided by the number of total shares outstanding. EPS tells you how much of a company's profit is attributed to each outstanding share of its common stock.
EBIT: Earnings before interest and taxes.
EBITDA: Earnings before interest, taxes, depreciation and amortization.
Expense:A company's incurring of liabilities or outflow or depletion of assets, through carrying out the activities that constitute their central operation.
Financial Statements: Reports of a company's past financial performance and current financial position. The four primary financial statements are the balance sheet, income statement, statement of shareholder's equity, and the statement of cash flows.
Fiscal Year (FY): A 12-month period over which a company accounts for its financial operations. Many companies calculate their financial data over a 12-month period that does not start on January 1. For example, a company's fiscal year may start in April and end the following March. Not all companies use the same fiscal year.
Fixed Assets: Long-term assets, such as manufacturing equipment, furniture and real estate held for business use and not expected to be converted to cash in the current or upcoming fiscal year.
Float: That portion of a company's total shares outstanding that can be bought and sold by the public. It is often expressed as a percentage of the total shares outstanding.
Fundamental Analysis: A form of investment analysis that focuses on a company's financial statements, earnings, sales and quality of management.
Gross Margin: A ratio calculated by subtracting the company's cost to manufacture the goods sold from the total sales, and dividing the result by the total sales. This ratio provides a measure of the efficiency of a manufacturing company.
Growth Stocks: Stocks of companies that have exhibited faster than average earnings gains and are expected to continue its record of high performance. Such stocks generally have higher price/earnings ratios and do not pay dividends.
Income Statement (Statement of Operations): A financial statement showing the revenues, expenses and income (the difference between revenues and expenses) of a company over some period of time.
Inflation: A continuous increase over time in the overall costs of goods and services.
Intangible Assets : A non-physical asset that represents a competitive advantage to a company, such as brand name, a trademark, patents , other intellectual property and goodwill.
Inventory: Goods that a company has produced or purchased, but not yet sold. Inventory is considered an asset. If inventory is growing faster than sales, this can be a warning sign that business growth is slowing.
Liabilities: Outstanding debts.
Long-Term Assets: Assets that will be consumed over multiple years. Examples include land, buildings, equipment and intangible assets (goodwill and accrued organizational expenses). Long-term (assets appear on a company's balance sheet.
Long-Term Debt: Loans and other debt obligations with maturities of longer than one year. Long-term debt appears on a company's balance sheet.
Market Value or Market Price:Most recent recorded price at which a stock traded.
Merger: Uniting of two or more companies to become one.
Net Income/Net Profit: Income after taxes, interest, depreciation and other expenses have been deducted.
Net Profit Margin: Net profit divided by net sales and expressed as a percentage.
Operating Income: Earnings before deduction of interest and taxes. This is a measure of the company's earning power from ongoing operations.
Overvalued Stock : Stock that trades at a higher price than the issuing company's reputation, earnings outlook or financial situation would seem to merit. For example, one sign of potential overvaluation is a price/earnings ratio (P/E Ratio) significantly higher than average for the market as a whole and for the industry to which the corporation belongs.
Preferred Stock: Capital stock with a claim on company earnings and assets that takes precedence over the claims of common stock in the event of the company's liquidation. Preferred stock often pays a regular dividend which is also paid prior to any dividend payments to common stockholders. Preferred stock usually does not carry voting rights.
Pretax Income: earnings before income tax is subtracted
Price/Earnings Ratio (P/E Ratio): A common measure for identifying undervalued and overvalued stocks. It uses the relationship between a company's earnings and share price to value a company's stock. The P/E ratio is calculated by dividing the current market price per share by the earnings per share. A stock's P/E ratio gives you a sense of what you are paying for a stock in relation to its earning power.
Price to Book Ratio : A ratio calculated by dividing a company's total market capitalization by its book value.
Prime Rate: In theory, the interest rate banks charge their best and biggest customers for short-term loans. In practice, banks sometimes vary the rate they offer depending on other factors such as the customer's creditworthiness.
Publicly Traded Company: A company whose securities can be bought and sold by the general public.
Quarterly Report: An unaudited document that most publicly traded companies are required to submit, reporting their financial results for and noting any significant changes or events in the quarter.
Quick Ratio: A ratio calculated by dividing cash plus accounts receivable by current liabilities. It measures a company's ability to quickly convert assets to cash to meet operating needs.
Rate of Return: Annual return on an investment. Rate of return may refer to the dividend yield or it may refer to the total return rate.
Ratio Analysis: The examination of the relationships between a firm's accounting numbers and trends over time.
Retained Earnings: Earnings a company reinvests in its core business or to retire debt after it pays dividends.
Return on Assets (ROA): A ratio calculated by dividing the company's EBIT (net income) by total assets. The ROA is one of the most commonly used profitability ratios.
Return on Equity (ROE): A ratio calculated by dividing the company's net income before common stock dividends is paid by the shareholder's equity. This ratio measures how much a company earns in relation to the amount invested in its common stock.
Return on Sales: A ratio calculated by dividing pre-tax profit by total sales. This relationship measures the efficiency of operations by showing the profits earned per dollar of sales.
Revenue : Money collected for providing a product or service. Companies that provide services generally use the term revenue whereas companies that manufacture products, such as automobiles, often use the term sales.
Sales: The total dollar amount collected for goods and services provided.
Sales to Inventory Ratio: A ratio calculated by dividing annual net sales by inventory. The sales to inventory ratio is a gauge of how rapidly merchandise is being moved and the effect on the flow of funds into the business.
Sales to Net Working Capital Ratio : A ratio calculated by dividing net sales by net working capital. This relationship may indicate whether a company is carrying more assets than necessary.
Shareholders' Equity: Calculated by subtracting the company's total assets from total liabilities.
Statement of Cash Flows: A financial statement showing the inflow and outflow of cash during a specified period.
Statement of Shareholders' Equity: A financial statement showing changes in shareholders' equity. This statement is useful for identifying reasons for changes in shareholders' claims on the assets of the company.
Stock:An instrument that signifies equity ownership in a corporation and represents a proportionate claim on a company's assets and profits.
Technical Analysis:A method of evaluating securities that focuses on the assumption that detailed market data ( charts of price, volume and open interest )can help predict future (usually short-term) market trends. Unlike fundamental analysis, it gives little weight to the intrinsic value of a company's business.
Total Assets:All assets, current and fixed.
Total Return Rate/Total Return : The rate of return that reflects the annual dividend paid on a stock (if any) plus any capital appreciation that has occurred during the time you had it.
Total Shares Outstanding : Shares of stock issued and in the hands of shareholders. Total shares outstanding can usually be found listed on company balance sheets as "Capital Stock Issued and Outstanding."
Undervalued Stock: A stock that trades at a lower price than the issuing company's reputation, earnings outlook or financial situation would seem to merit.
Valuation: Process of estimating the future worth of a company's stock. One standard method of estimating the value of a company's stock is the P/E ratio.
Volatility : A measure of how quickly and to what degree the value of a security, market, or market sector fluctuates. The volatility of a stock relative to its overall market index is known as its beta.
Warrant: An instrument giving the holder the right to purchase shares of a company's stock at a stipulated price, usually within a specified time frame.
Working Capital: The difference between current assets and current liabilities.
Yield: That portion of return for a stock that is paid in the form of dividends. For fixed-income securities such as bonds or notes. Yield is the effective rate of interest paid.